Despite this, there are ways to find companies with room to grow yet also have good dividend fundamentals. Qualitatively, investors can look for companies in mature markets that may be experiencing a resurgence in growth through new technologies or processes. New developments in the sector could mean lower costs and higher margins making previously unprofitable projects a good investment.
Additionally, globalization and the advance of emerging markets have presented growth opportunities to many mature sectors within the U.S. market. Since companies want to avoid the message sent by cutting dividends, new growth opportunities are usually funded through low-cost debt.
Quantitatively, investors should look for companies with positive dividend growth rates and strong trends in revenue and returns. A positive dividend growth rate over the last five years shows management’s commitment to investors. The stocks below are all projected to see annual revenue and EPS growth of more than 15% over the next fiscal year. They also have a return on equity of greater than 15% and pay a dividend yield of at least 2%. Most importantly from a dividend perspective, their dividend growth over the last five years is positive and stable. This screen can be modified to tilt toward higher current income or growth potential. Dividend yields in excess of 5% are hard to find without seriously inhibiting growth, while yields below 1% do not really show much current income commitment on the part of the company.
Caterpillar (CAT) not only made the list of dividend-payers with growth potential, but was also featured in a previous article highlighting investments for the comeback in commodities. The company benefits from two of my favorite investment themes, agriculture and emerging market infrastructure. Strong returns from crop prices and consolidation in farm ownership will drive growers to update their equipment to increase yield. The lack of quality infrastructure in many emerging countries means serious bottlenecks in logistics and growth, driving infrastructure spending. Strong growth in emerging markets should support revenues until construction picks back up in the United States.
The stock just barely meets the minimum dividend yield of 2%, but growth from emerging markets makes up for lower current income. The company acquired Bucyrus International in July of this year, a deal estimated to bring up to $500 million in growth and savings by 2015 (conference call pdf). The stock price has outperformed the S&P500 by 21.4% over the last twelve months.
Baytex Energy (BTE) is a $6 billion oil & gas company operating in Canada and the United States. The company operates in three segments: Canadian Heavy Oil, Canadian Light Oil and Natural Gas. Heavy oil accounted for 76% of total revenues for the latest quarter, with 17% from light oil, and 7% from natural gas. The shares are the most expensive of the group with a price-earnings ratio of 30.7 times but the company also has the second highest return on equity and strong growth prospects. Shares will be closely linked to oil prices and economic events but the company’s net profit margin is at the top of its peers at 21.6%. The stock price has outperformed the S&P500 by 8.2% over the last twelve months.
Newmont Mining (NEM) is one of the world’s largest gold producers with operations across North & South America, Africa, and Asia-Pacific. As of the end of 2010, proven and probable gold reserves totaled 93.5 million ounces for an increase of 1.9% over the previous year. The company also derives 19.4% of its sales from copper mining. The company’s revenues are heavily weighted from Asia-Pacific (50%) and Latin America (12%). Continued solvency problems throughout the developed world should support gold prices but may be volatile given headline risk. Striking workers in Indonesia and Peru could challenge short-term revenues but should not materially affect longer-term growth. The stock price has outperformed the S&P500 by 11.4% over the last twelve months.
V.F. Corporation (VFC) is the world’s largest apparel manufacturer and offers products under the brand names: Vans, The North Face, JanSport, Eastpak, Wrangler, Lee, MLB, NFL, and Harley-Davidson. With the diversity in products and strong brand identity, the investment is largely a play in retail sales and the general economy. To that point, though problems in Europe persist, fundamental strength is returning to the U.S. in the form of retail sales and a marginally better job picture. Consumer spending increased by 2.4% in the third quarter and retail sales have been strong over the last two months.
The progressively better environment for the U.S. economy is something I further detailed in a recent article exploring short-term optimism in Amazon (AMZN). With the holiday season quickly approaching, retailers could outperform on above-consensus sales. The stock price has outperformed the S&P500 by an impressive 59.6% over the last twelve months.
Though most strong dividend payers are in mature industries with fewer growth opportunities, a diligent search of qualitative and quantitative factors can uncover growth stocks that pay respectable dividends as well. The efficient way of doing this is starting with a quant-driven screen to weed out companies with weak fundamentals, then qualitatively separating those with the best growth potential.For the latest updates on the stock market, visit Stock Market Today For the latest updates PRESS CTR + D or visit Stock Market news Today
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